Tax evasion and the Criminal Finances Act

Part three of the Act came into force at the end of September last year, creating two offences of corporate failure to prevent the facilitation of both UK and foreign tax evasion.

The new offences are modelled on the failure to prevent bribery offences under the Bribery Act 2010; however, tax evasion risks are far wider; very different in their presentation; and require a bespoke approach.

In essence though, the legislation aims to make corporates criminally responsible for tax evasion facilitation offences committed by their employees, agents and others associated with them.

Scope of the new statutory offences

It boils down to this — if an employee or an agent of a corporate anywhere in the world facilitates the evasion of tax then the corporate itself may have committed a criminal offence.

This brings with it the potential of unlimited fines and serious regulatory consequences globally in all countries where it has a presence.

The UK offence requires three elements —

• Criminal evasion of tax by the taxpayer. This includes the offence of cheating the public revenue and all other statutory offences involving being knowingly concerned in the fraudulent evasion of tax. This can include taking steps to facilitate tax evasion without any actual tax evasion or any conviction for tax evasion

• Criminal facilitation of the tax evasion by an associated person of the relevant organisation acting in that capacity. This requires deliberate and dishonest action to facilitate the taxpayer’s evasion

• Failure by the relevant organisation to prevent that criminal facilitation. Reasonable prevention procedures must already be in place for the relevant organisation to benefit from the statutory defence

The foreign offence is committed where a relevant organisation or an associated person of a relevant organisation facilitates foreign tax evasion, and one of the following applies —

• The relevant organisation is incorporated or formed in the UK

• The relevant organisation carries on business, or part of a business, in the UK

• Any conduct constituting part of the foreign tax evasion facilitation takes place in the UK

For example, if an employee of a bank in India facilitates the evasion of Chinese tax and if that Indian bank has any operations in the UK, even operations entirely unconnected with its Chinese tax evasion, the Indian bank may have committed a UK criminal offence.

The statutory defence

The only defence is for the organisation to show the facilitation of tax evasion took place despite there being reasonable procedures already in existence to prevent it happening.

If organisations take no steps at all in reaction to the new rules, then they’re unlikely to be able to rely on the defence, and a criminal offence will have been committed.

Assessing the level of risk

Primary targets are the financial services, legal and accounting sectors.

These types of organisations should have in place a series of risk assessments, taking into account world-wide operations, and determining where there may be a material risk of facilitating tax evasion.

The level of measures depends on the type of business.

Even a “low risk” organisation should put some basic measures in place: including, for example, a prominent statement issued by senior management stipulating that the organisation is committed to the prevention of tax evasion and that employees must not engage in the facilitation of tax evasion.

However, business sectors with a medium to high risk of facilitating tax evasion need to give greater consideration as to what procedures are reasonable for them and continue to assess risk as the business evolves.

These higher risk sectors are likely to include industries such as oil and gas and mining, where businesses often operate in countries with a weak rule of law, leaving them more open to the risk of corruption.

Implementing reasonable prevention measures

HMRC has issued guidance on reasonable preventative measures to tackle tax evasion and how to assess the level of risk for different types and sizes of organisations.

These reflect those for the Bribery Act 2010 and include —

• The importance of the commitment of top-level management to preventing the facilitation of tax evasion

• The introduction of effective internal communication, including whistle-blowing channels

• The need to monitor and review procedures put in place

In short, in order to protect themselves from falling foul of the regime, businesses, especially those operating in higher risk sectors, need to have well defined and communicated preventative measures in place.